TESTIMONY OF
JOHN F. BOVENZI
DIRECTOR
DIVISION OF DEPOSITOR AND ASSET SERVICES
FEDERAL DEPOSIT INSURANCE CORPORATION
ON
THE FDIC'S HANDLING OF SMALL BUSINESS ASSET FORECLOSURES
AND THE RTC'S HANDLING OF ASSETS FROM
COMFED SAVINGS BANK IN LOWELL, MASSACHUSETTS
BEFORE
COMMITTEE ON SMALL BUSINESS
SUBCOMMITTEE ON GOVERNMENT PROGRAMS
U.S. HOUSE OF REPRESENTATIVES
2:00 P.M.
WEDNESDAY, SEPTEMBER 25, 1996
ROOM B363, RAYBURN HOUSE OFFICE BUILDING
WASHINGTON, D.C.

Mr. Chairman and members of the Subcommittee, my
name is John F. Bovenzi, and I am Director of the Federal Deposit
Insurance Corporation's Division of Depositor and Asset Services.
We appreciate the opportunity to discuss our handling of small
business assets acquired through the failure of insured depository
institutions.

In your invitation letter, you asked the FDIC to provide
testimony on its handling of small business asset foreclosures. In
addition, you specifically asked for testimony on the Resolution
Trust Corporation's (RTC) handling of small business asset foreclosures
from ComFed Savings Bank in Lowell, Massachusetts. ComFed failed
in December 1990. From December 1990 through December 31, 1995,
the assets of ComFed were handled by the former RTC. The FDIC
assumed responsibility for the ComFed assets when the remaining
responsibilities of the RTC were transferred to the FDIC by law at
the end of 1995. Although we have been responsible for these assets
for only the past nine months, our testimony will attempt to address
questions that you might have regarding ComFed.

The past ten years have posed tremendous challenges to the
banking industry and the FDIC. During that time, nearly 1,250
commercial banks and Bank Insurance Fund-insured savings banks
have failed with combined assets of over $225 billion and deposits
of almost $190 billion. The FDIC has resolved these failures
without taxpayer assistance.

Over the same period, almost 1,100 savings associations
failed and were resolved by the former Federal Savings and Loan
Insurance Corporation and RTC. These savings associations had
combined assets of over $540 billion and deposits of almost $445
billion. According to the Government Accounting Office, the
estimated direct cost to the taxpayers of these failures is almost
$125 billion.

More recently, only five banks and three thrift institutions
failed in 1995, and only four banks and two thrift institutions have
failed so far this year. Our projections indicate that we will continue
to experience a relatively small number of bank failures in the coming
years.

Although our job of disposing of assets is not yet complete,
the vast majority of acquired assets have been returned to the
private sector. At the peak of its resolution activities, the RTC
managed more than $175 billion in assets from failed thrift institutions.
Similarly, the FDIC once managed more than $50 billion in assets from
failed banks. Currently, our asset inventory, including those assets
acquired from the RTC, is around $13 billion. We anticipate handling
less than $8.5 billion of assets by year-end.

Despite a level of bank failures unprecedented since the
Great Depression, no insured depositor has suffered a loss as a
result of these failures. Because the FDIC was able to provide
depositors with access to their deposits quickly, many depositors
noticed little if any disruption in banking services when their banks
failed. The FDIC's ability to accomplish this without taxpayer
assistance was due in large part to our success in realizing market
value on inherited assets and returning them to the private sector.
On average, we recover about 95 percent of appraised value on
loan sales and about 90 percent of appraised value on real estate
sales.

In addition to making sure that insured depositors receive
their funds as soon as possible after a bank fails, the FDIC has a
statutory responsibility to the creditors and shareholders of the
bank under the Federal Deposit Insurance Corporation Improvement Act of
1991 (FDICIA) to minimize losses by obtaining maximum recovery from the
assets of the receivership. The assets are owned by the estate of the
failed bank, and many of our asset disposition activities are similar
to those of a bankruptcy trustee in that funds we recover benefit other
creditors of the estate as well. We try to carry out these
responsibilities in a way that attempts to balance our obligation to
maximize recoveries and minimize losses to the deposit insurance funds
with the desire to work with borrowers as they repay their loans.

Another concern of the FDIC when it conducts its liquidation
activities is to minimize any adverse effect on the economic
stability and well-being of the local community. Returning the
failed bank's loan assets to the private sector as quickly as possible
permits borrowers and the local economy to reestablish the new
lending relationships that will provide long-term funding for
businesses. In this way, the FDIC works with local businesses to
limit the impact of a bank failure on the availability of credit in the
local economy.

When a bank fails, the FDIC first attempts to locate a buyer
to assume the failed bank's deposits and purchase its assets. Even
if an assuming bank is found, that bank generally will not assume
problem loans. We work with the assuming bank to negotiate
asset-purchase options, put-back provisions and loss-sharing
arrangements in order to return loans to the private sector as soon
as possible.

After a bank failure, borrowers are legally required to repay
outstanding loans to the receivership estate just as they would if
their bank had not failed. Recoveries on these loans then are used
to pay off the failed bank's creditors, including the FDIC. In
ComFed, as in other RTC receiverships, any recoveries on the
thrift's assets also helped reduce the losses of U.S. taxpayers.

The FDIC evaluates the circumstances of each failed bank
borrower individually and attempts to tailor a resolution of that
borrower's debt based on the borrower's ability to pay and on the
fair market value of any pledged collateral. FDIC employees, as
well as asset management contractors, are directed to be receptive
to any proposal a borrower may have that would help resolve a
problem loan situation while fulfilling our mandate to maximize
recoveries and minimize losses to the deposit insurance funds.
Because each borrower's situation is unique, various options are
evaluated and analyzed to formulate a repayment plan that offers
the best chance for a successful resolution. Generally, it is in the
best interests of both the FDIC and borrowers to return a loan to a
performing status. This is especially true for small businesses
whose value is more often retained in their ability to produce
income, rather than in the value of their physical assets. The
FDIC's policies for dealing with borrowers from a failed bank are
contained in the FDIC's Asset Disposition Manual, which is publicly
available.

The FDIC prefers to work with borrowers to achieve a
mutually agreeable repayment plan for unpaid loans. Foreclosure
or other legal action is utilized rarely and only as a last resort. In
working with borrowers, we analyze all viable alternatives for
resolving a loan and weigh the recovery from a negotiated settlement
against the expected recovery through a competitive sale or
foreclosure. Consequently, we generally reach agreements with
the vast majority of borrowers.

For borrowers who cannot repay their obligations as origi-
nally intended, several options are available. For example, we will
release collateral for fair market value, establish repayment schedules
based on ability to pay, and compromise loans for less than the
full amount owed. To facilitate a borrower's refinancing efforts,
we also have absorbed closing costs and out-of-pocket expenses
associated with obtaining a new loan.

Each of these approaches requires the borrower's full
cooperation. Frequently, loan files that we acquire from a failed
bank are poorly documented. Therefore, it is essential that borrow-
ers work with us to furnish current financial and other relevant
information so that a mutually acceptable resolution can be
reached. If a borrower refuses to pay or to provide necessary
financial information, the FDIC has no choice but to seek recovery
from the collateral. Under no circumstances, however, will the
FDIC foreclose or litigate with a borrower who is meeting its
obligations under a loan agreements with the failed institution.

A review of our past record in dealing with borrowers from
failed banks shows that we consistently exhaust viable consensual
alternatives that maximize recovery before resorting to foreclosure.
A few years ago, at the height of credit problems in New England,
we reviewed more than 130,000 loans from failed New England
banks. We completed foreclosure actions on just over one percent
of them. Further, many of these foreclosures were initiated by the
banks before they failed, and before the FDIC stepped in, or involved
cases where the borrower voluntarily relinquished their property.

Because of the time and expense involved, foreclosure
generally is not a cost-effective method of resolution. Moreover,
we are aware of no cases where we foreclosed on a borrower who
demonstrated a willingness to cooperate and has the ability to
maintain a realistic payment program. Unfortunately, we are
sometimes left with no reasonable alternative than to foreclose due
to the inability or unwillingness of the borrower to make consistent
payments.

ComFed Savings Bank

On December 13, 1990, ComFed was declared insolvent by
the Office of Thrift Supervision and the former RTC was
appointed conservator. ComFed subsequently was placed into a
liquidating receivership by the RTC on September 13, 1991. The
RTC was responsible for the resolution of ComFed's assets through
December 31, 1995. During this period, the FDIC had no oversight or
other responsibility with respect to ComFed. On January 1, 1996,
by operation of law, the RTC ceased to exist and the FDIC succeeded
to all rights, titles and interests of the RTC in its capacity as
receiver of ComFed.

At the time of conservatorship, ComFed had assets of
approximately $1.4 billion. When ComFed was placed into a
liquidating receivership, the RTC retained $723 million in assets,
of which approximately $578 million were loans and owned real
estate. Currently, less than $56 million in ComFed assets remain
in liquidation. The remaining ComFed portfolio includes 295
loans with an aggregate book value of $12 million, of which 276
are loans secured by one-to-four family residential properties. The
bulk of the remaining assets consists of owned real estate.

The loan tracking system used by the RTC was not operational at
the beginning of the ComFed conservatorship, but has been operational
since mid-1992. This system tracked approximately $485 million in
ComFed real estate loan dispositions. Negotiated sales and securitized
transactions accounted for 95 percent of the loan dispositions.
Completed foreclosures from the ComFed receivership accounted for less
than one percent of total loan dispositions. Our research indicates that
the vast majority of the foreclosed properties were in foreclosure at the
time of ComFed's failure.

While the Committee's invitation did not request testimony
about any specific asset of ComFed, we note that Ms. Rhetta
Sweeney will appear as a witness. For the Committee's information, we
have attached an Appendix describing the history of resolution efforts
of Ms. Sweeney's loan. We note that Ms. Sweeney received a loan of
$1.6 million in 1987, but has failed to make any principal payments
on that debt. The Appendix also describes recent settlement offers
made by the FDIC to resolve this matter, which it inherited from the RTC.

Summary

In conclusion, the FDIC is faced with the arduous and
occasionally unpleasant task of dealing with problem assets in a
sometimes difficult economy. As you are aware, the success of our
efforts has a direct impact on the banking industry that pays deposit
insurance premiums. In addition, the success of our efforts as
successor to the RTC has a direct impact on the taxpayers of this
country and the total costs for the resolution of the savings and
loan crisis.

Above all else, we must protect the depositors of failed
banks. To do this, borrowers must be expected to repay their
financial obligations to the extent that they are capable of doing so.
While we work with borrowers to reach mutually acceptable
repayment terms, we sometimes are left with no acceptable alternative
than to resort to legal action and foreclosure. These actions
are wholly consistent with our statutory responsibilities. Although
the FDIC was not responsible for RTC assets prior to this year, the
low number of foreclosure actions out of ComFed is consistent
with the FDIC's past experience.

Despite the shocks to the U.S. financial system over the
past 15 years, no losses have been suffered by insured depositors,
thousands of loans have been amicably resolved and returned to the
private sector, public confidence in our banking system has been
maintained, and no taxpayer money has been required to resolve
any failed banks.